strategy for options portfolios

Discussion in 'Options' started by crayon851, Nov 8, 2014.

  1. Risk/reward is always related to probability of success. You cannot have good risk/reward AND high probability of success. You will have to decide which one is more important.

    As a rule of thumb:
    1:1 risk/reward = 50% probability of success
    1:4 risk/reward = 20% probability of success
    4:1 risk/reward = 80% probability of success

    In another words, if your short leg has delta of 0.50, you will pay roughly 50% of the debit, so you risk $1 to make $1, and you have 50% probability that the spread will expire in the money for a full profit.

    But the real question is how you manage those trades.
     
    #11     Nov 15, 2014